Posted by: Adam Roake | August 3, 2009

PRIVATE RENTAL SECTOR INITIATIVE

The article below from the FT has spawned blog posts in the Planning press with some astonishingly ill-informed comments . The main thrust of the objectors seems to be a misplaced belief that the planning system cannot refuse applications on the grounds of poor design and even if it could there is no way of measuring design quality. Nowhere in either post or comments is there a reference to Building For Life, the national standard for well-designed homes and neighbourhoods nor to the fact that the Planning Act 2008 puts good design at the heart of primary planning legislation.

What none of the posts or comments looks at is the rather dubious financial arguments. For example why can we expect the rental market to grow by nearly 2% over six years? Since new build is at best replacing about 1% of the existing stock this means that more than a third of all new homes built will be in the private rented sector. Why would long term yields theoretically equivalent to gilt yields be attractive without the security implied by gilts? Or maybe the proposal does actually rely on capital growth in which case the institutional investor will at some stage look to realise profits and dispose of the asset. Not much of a long term solution then? Who knows? I can’t see why “the time is right now”. Granted the market is at a low point in terms of capital value but I don’t see how this makes residential rental yields so much more attractive in the long term. It certainly makes capital growth more attractive in the short and medium term but that is not the same thing!

 

Identical flats to stimulate sector

By Daniel Thomas in London

Published: July 26 2009 23:37 | Last updated: July 26 2009 23:37


Big investors will move in on territory dominated by amateur and buy-to-let landlords

A tenant could soon be able to walk into a block of flats in almost any town in the UK and find identical features and quality, under plans to introduce US-style mass-produced rental accommodation.

Backers of standardised rental want to provide an alternative to navigating the hazardous UK market, which is dominated by individuals and small businesses. The option will move the country closer to the US, northern Europe and parts of Asia, where this sort of rental experience is widespread.

Aviva Investors is one of a number of institutions looking to raise funds to create an asset class out of rental homes in the UK. In doing so Aviva – and others likely to follow its lead – will be answering the government’s call for greater involvement in the private rental sector to bridge the funding gap left by the banks’ retrenchment and for a sales route to stimulate house building.

Many institutions have explored the idea of investing in the UK rental market in the past, particularly during the buy-to-let boom when private investors made large profits.

But most institutions have been discouraged by barriers such as management costs, difficulties in piecing together a large portfolio and the uncertainty of income.

Aviva, with adviser CB Richard Ellis , is expected to raise about £500m in equity, matched by a similar amount in debt. That will give it the firepower to buy thousands of flats and houses built for rent.

The group is focusing on rental income, rather than capital value increase, to generate returns. In theory, rental income should provide a long-term yield similar to a gilt.

“It is the UK taking on the US model for the first time,” said Nick Jopling, head of residential at CBRE. “This is not a short-term, opportunistic model for distressed property.”

The business model is predicated on growth of the rental market, and partners expect that first-time buyers will continue to struggle to find deposits and families will increasingly turn to quality renting.

About 13 per cent of UK homes are rented, according to Mr Jopling, compared with 68 per cent under private ownership and the remainder in social housing. A small increase to about 15 per cent, he said, would mean more than 450,000 additional rental homes.

“We anticipate a significant increase in renters. For the first time in my lifetime, this market has a chance to take off. The buy-to-let model is largely broken and this has a real chance of replacing it,” Mr Jopling said.

Other institutions, however, say the government would have to do more to mitigate risk for the model to succeed.

In May, the Homes and Communities Agency called for investment proposals for the UK private rented sector. So far, the HCA mostly provides strategic advice, but it is thought to be considering providing public-sector land and potentially some form of rental guarantee.

Sir Bob Kerslake, HCA chief executive, said: “There has been a long-held view that institutions should go into residential but it hasn’t happened for a whole host of reasons. This will kickstart site development.”

There were social benefits too, he added. “There are people not eligible for social housing but that cannot afford to buy. They might have to put up with lower-quality rental through buy-to-let.”

Nigel Hugill, who chairs the HCA’s housing finance group, said attracting institutions into the sector was crucial. “We need to leverage new money into the sectorThe long-term aspiration is to create a separate institutional residential sector,” he said.

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Responses

  1. Hi Adam. Just to respond to your post regarding my “astonishingly ill-informed blog post”. I am well aware there is a raft of design legislation and guildelines already in place. There seems to be a new one every month at the minute. My argument is that, despite these, ‘bad design’ still happens. I was trying to start a debate into why this is. Perhaps I should have made that clearer. Of couse I welcome comments from everyone and a debate is always welcome!

    • In my defence, you don’t quite say that in your blog. And to be fair to you, it was the comments which so surprised me. I’ve changed my post to make that clearer.
      Actually though the design policies have been with us for many years (Building For Life since 2003 and PPS1 nearly as long) and I suspect the problem lies with the planning system’s inability to understand what good design is (as Stevel). In my view the root of the problem lies in the political decisions taken by members who seem to be even less well trained these days, if that is possible. My earlier posts are relevant.


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